What is Debt-to-EBITDA Ratio?
Debt-to-EBITDA compares a company’s total debt (or net debt) to its earnings before interest, tax, depreciation, and amortization. Lenders and analysts use it as a leverage measure: a quick proxy for how many years of EBITDA would be needed to repay the debt.
How It Works
- Formula: Total debt / EBITDA (or Net debt / EBITDA)
- Lower is safer; higher is riskier
- Some loan agreements set a maximum for it; if your lender has its own definition, follow it
- Compare it with the company’s own prior periods and with similar companies
Saudi Context
For a Saudi business, add back zakat and income tax together, as in the EBIT line of Qoyod’s income statement; VAT is not added back, because it is not a tax on profit. IFRS does not require EBITDA to be presented in the financial statements, and its definition varies between users, so if a financing agreement defines the ratio, use that definition.
Example
A Saudi industrial company has net debt of SAR 4B and EBITDA of SAR 2B. Debt-to-EBITDA = 2.0x, meaning the net debt equals two years of EBITDA. If a downturn cuts EBITDA to SAR 1B, the ratio doubles to 4.0x.
To work out the ratio from your own figures, use the EBITDA calculator.